The ins and outs of land inheritance

As a recipient or provider of gifted land, a farmer must prepare and follow a plan to avoid tax consequences

If you have recently inherited a new piece of land or are considering gifting a farm to the next generation, you may have some questions about the process to ensure you have covered all your legal obligations.

To help address this topic, Frank Arnold, a master financial advisor with Future Plus Professional Services in Woodville, outlines how farmers can reduce the amount of federal tax associated with the gift. Future Plus Professional Services helps clients with tax returns, bookkeeping and consulting.

Producers who receive land may not have as many legal responsibilities as the people who gifted the land, but such obligations vary depending on the situation.

“The actual tax consequence lies with the person or the entity that is selling or gifting the property and not with the person or entity who receives it,” Arnold said.

However, if the inheritance results from a death in the family, “the person who receives a property, especially through a will, is often also the executor and is therefore responsible for fulfilling all tax obligations of the deceased.”

While inherited property is generally non-taxable in Canada, a farmer who inherits property should keep an accurate record of its market value at the time he or she receives the land. If the farmer who inherited the land decides to sell it in the future, knowing the asset’s value at the time of inheritance will determine how much capitalgains tax he or she will owe at the time of sale, a Personal Tax Advisors’ article said.

Those individuals who are considering passing their lands on to relatives or neighbours must plan ahead to avoid high tax charges. For example, farmers in this situation should make arrangements beyond designations outlined in their wills.

“I wish that older people who have worked so hard to build their wealth and want to keep their legacy alive by handing things over to the next generation understood that you need to plan for land inheritance if you want to avoid sometimes nasty tax consequences,” Arnold said.

In some cases, without “simple planning you are taking the chance of owing more taxes than you otherwise would.” Sometimes, a will does not cover all the necessary information, he added.

Establishing and following a plan can help reduce the burden on the next generation.

“If the family had not planned for land gifting, the determination of what to do with the inherited property is then driven by the simple question: do you need to sell to have the money to pay the taxes of the deceased and pay off whoever else is named in the will?” Arnold said.

Fortunately, forward thinking and advanced planning can help farmers and their families avoid such decisions and the associated high taxes.

“Farmers who have built their operations over the span of a lifetime or are themselves already second or third generation farmers know that there is a transition phase from one generation to the next. Specific planning is needed to do this succession successfully,” Arnold said.

Informed financial experts can also help farmers through the inheritance process.

“The capital gains exemption rules for farmers makes a transition possible without any tax consequences or if the operations are larger, the exemption lowers the tax burden,” Arnold said.

“The best way to avoid or minimize tax consequences is to look for a professional tax adviser who can help you understand the consequences of gifting, selling or inheriting land and help you build a strategic plan for the scenario.

“It is very important that the tax professional is working closely with other professionals, like lawyers, to cover all angles of the plan,” he added.

Overall, Arnold suggests that farmers consult with financial experts to fully understand any legal obligations and to reduce the possibility of high tax charges when the land switches hands.

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